Directors' Legal Duties Under The Company Act

11/09/09

The Dutiful Director

By Nigel Miller

The Companies Act 2006 ("2006 Act") codified directors' duties for the first time. After a phased implementation timetable, all seven new statutory duties are now in force. We take a look at each of the duties in turn and provide some practical examples.

(1) To act within the company's constitution and to only exercise powers for a proper purpose

Constitutional documents include the company's articles of association as well as any instructions given to the board by shareholders say in a shareholders' agreement.

An example of when this duty may come into play is a requirement...

...that two directors are present at a board meeting in order for the decisions of the meeting to be valid and the meeting to be "quorate". This prevents one director making unilateral decisions that could be detrimental to the company and its shareholders.

(2) To exercise independent judgment

You must exercise your own judgement for the benefit of the company as a whole. A director must not use his or her position to further the interests of a single shareholder or a particular group of shareholders.

The duty to exercise independent judgment does not prevent a director from taking professional advice or from using others as a "soundboard". The director must consider the advice he is given and reach an independent conclusion himself, having regard to the interests of the company as a whole.

As an example, often, a significant shareholder will have a right to appoint a director to the board of a company. The director will usually report to his appointer and inform the other directors of his appointers wishes. It is however important that this nominee director, also acts in the interests of the company as a whole and not just in his appointer's interests.... continued on page two >

 

 

Advertisement

Advertisement